Damages Based on a Hypothetical Release Fee ("Wrotham Park Damages") No Longer Available in Restrictive Covenant Disputes

Liam Tolen, Dispute Resolution Lawyer, discusses the recent Supreme Court judgment in Morris-Garner and another (Appellants) -v- One Step (Support) Ltd (Respondent) [2018] UKSC 20

In 2016 the Court of Appeal upheld the decision to award Wrotham Park damages for a deliberate breach of restrictive covenants set out in a Share Purchase Agreement by the founder and 50% shareholder of the Claimant business. This effectively created a novel measure of damages for a claim concerning a breach of a restrictive covenant. The Supreme Court have now overturned that decision (and perhaps less importantly, confirmed the correct pronunciation of Wrotham - surprisingly it does not rhyme with Gotham and is fact pronounced Rootum).

What are Wrotham Park Damages 

In broad terms it is an assessment of damages which seeks to "compensate" the Claimant for such amount as would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendants from their obligations. The Supreme Court prefers the term "negotiating damages". In the context of restrictive covenants it is the "price worth paying" to be released from the covenant.  

The First Instance Decision and the Court of Appeal

Phillips J, was satisfied that the case before him was a prime example of a case in which negotiation damages should be, and were available. As is commonplace in breach of restrictive covenant cases, it would, he said, be difficult for the claimant to identify the financial loss it had suffered by reason of the defendants’ wrongful competition, not least because there was a degree of secrecy in setting up the competing business.

The Judge then went on to make a declaration that allowed the Claimant to elect either traditional compensatory damages or negotiating damages.

The Court of Appeal agreed stating that the relevant legal test was whether it was just in the circumstances to award negotiating damages and that the Court may do so on a broad brush basis taking into account the difficulties in establishing damages on the ordinary basis.

The Supreme Court

The Supreme Court disagreed and allowed the appeal. Lord Reed considered that the Courts below had erred in their approach to the assessment of damages and the correct measure of damages was the traditional compensation for the losses incurred as a result of the breach of contract.

The Supreme Court's decision sets out a diligent analysis of the relevant authorities and  reaches the conclusion that negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset.

To put it another way the claimant must be able to show that it has, in substance been deprived of a valuable asset, and its loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.

That is not the case with a breach of a restrictive covenant. The breach of contract in a restrictive covenant dispute does not result in the loss of a valuable asset which was created or protected by the contractual provision which was infringed. Therefore Wrotham Park damages are not available. 

Comment

The Supreme Court upholding the appeal, whilst not surprising, is an upset for claimants wishing to pursue claims for breaches of restrictive covenants. It squarely (re)burdens the claimant with what can in some cases be an impossible (or at least very difficult task) of evidencing its losses. That said, the Courts and lawyers alike, are well guided by highly skilled Expert Witnesses familiar with this type of loss, which can be quantified in a conventional manner.

Further still, the effectiveness of an interim injunction restraining further or anticipated  breaches is a powerful tool which should not be underestimated. Some commentators had suggested that the availability of negotiating damages eroded the prospects of obtaining an injunction as it potentially dilutes arguments justifying an injunction on the basis that damages would not be an adequate remedy.

On balance, and given that the granting of an interim injunction often leads to a swift resolution of a restrictive covenant dispute, losing negotiation damages as a measure of loss is probably a price worth paying. Availability of such damages has been short lived and its loss to those seeking to rely on restrictive covenants should not be of concern especially when, as may often be the case, as stated by Lord Reed: "the proposition that estimating the hypothetical release fee is simpler … than estimating the loss suffered does not hold water".